At the beginning of 2015, Russia’s state-owned oil producer Rosneft entered Georgia’s oil retail market by purchasing a 49 percent stake of Petrocas Energy Ltd. Petrocas’ affluent assets include an oil terminal in Georgia’s Black Sea port of Poti with a capacity of 1.9 million tons per year as well as a network of 140 gas stations in Georgia under the Gulf brand.

By launching a joint venture with Pertocas, Rosneft will gain high-quality storage capacity in one of the major oil and oil products hubs in the region, enrich supply routes options and enhance its operations in the Central Asia and South Caucasus oil market. “[It] is a new milestone that will highlight the strategic importance of the South Caucasian energy corridor,” the main shareholder of Petrocas, Russian businessman David Iakobashvili said.

The opposition United National Movement (UNM) party insisted that Rosneft plans to acquire a controlling interest in Petrocas and called on the government to revoke a deal damaging to state interests. The government responded that it was during UNM’s term in power that Russian investments penetrated strategic areas of Georgia’s economy such as finances, electricity, chemicals, ore industry, food and dairy products. For example, at that time, the Russian state-owned electricity trader, Inter RAO, obtained 75 percent of Tbilisi’s electricity distribution company Telasi, thermal power generating plants, as well as the management right of two hydro power plants; Khrami I and Khrami II. The government also lamented that it has no right to influence private business, especially the decisions of Petrocas, which is registered in Cyprus and manages its operations from there.

UNM counter-argued that Rosneft operations in Abkhazia breach the Law on Occupied Territories and that the government is obliged to cancel the agreement granting the Russian company “the most important communications on the country’s Black Sea shore.”

Indeed, in 2009 Rosneft started offshore explorations and development of oil and gas fields in Abkhazia under an agreement signed between the company and Abkhazia’s de facto government. Against this background, three of Georgia’s government agencies began to study the legitimacy of the Rosneft-Petrocas deal. The results are yet unknown.

The recent deal reflects Russia’s strategy to strengthen its infrastructure capabilities in the South Caucasus to ensure an uninterrupted delivery of oil as well as other products to Armenia, which recently became a member of Eurasian Economic Union (EEU) but lacks land access to other EEU members in the absence of common borders. The reconstruction of the railway through Abkhazia and the planned Avro-Kakheti highway from Dagestan to eastern Georgia and then to Armenia, can be understood in this light.

While improving Armenia’s situation is Moscow’s key rationale, the Kremlin is also interested in consolidating its position in the Georgian market. UNM asserts that the Rosneft-Petrocas deal is only the beginning of “a big process” and unless countervailing measures are taken, “Moscow will have no obstacles at all.”

On January 17, Iase Zautashvili, the General Director of Airzena, Georgia’s national airlines, disclosed correspondence between Georgian and Russian state agencies regarding the prospect of restoring flights between the two countries. These clandestine negotiations aim to grant Russian companies a monopolistic position in Georgian airspace, Zautashvili said.

Referring to other covert correspondence taking place between the Russian and Georgian sides via the Swiss Embassy, UNM claims that 11 Russian companies, including Vladimir Putin’s Private Company, will enter Georgia’s airspace by dumping prices and eliminating the competition, including the national airlines, in order to obtain a monopolistic position in the Georgian market. The UNM also claims that some of these companies fall under the international sanctions against Russia while others have violated the Law on Occupied Territories.

The Enguri hydropower plant with a total capacity of 1,300 megawatts could become another target of Russian strategic interest. Russia allegedly intends to register Georgia’s most powerful hydroelectric station in the region in Abkhazia. Although Georgia’s Ministry of Energy categorically denies that the plant’s ownership is under discussion, Aslan Basaria, Director of Abkhazia’s power company Chernomorenergo, claims that negotiations have already been launched with participation of the Georgian side. “The plant is located on Georgian territory and belongs to the Georgian state. The Chernomorenergo Director General’s statement is far from reality,” the Ministry of Energy says. Despite the denial, Sokhumi in fact raised the question of the Enguri hydropower plant’s ownership a month ago when Abkhazia’s de facto leader Raul Khajimba said “what is located on our territory should be owned by the Abkhaz people.”

In fact, the Enguri generators are located on the territory of occupied Abkhazia while its arch dam is in the Georgian-controlled area. According to the informal agreement reached between Tbilisi and Sokhumi in the 1990s, Abkhazia gets 40 percent of the electricity generated by the plant free of charge while the rest goes to Georgia. The fact that the agreement terms are rather favorable to the Abkhaz side suggests that the questions raised over the plant’s ownership comes from Moscow, rather than Sukhumi.

Taken together, signs are emerging of several steps taken by Russia to make inroads into vitally important sectors of Georgia’s economy.

In the course of 2014, developments in the Georgian-Ossetian Administrative Border Line (ABL) attained some attention in both Georgian and international media. This was due to renewed fencing activities by the Russian army and the de facto South Ossetian authorities in September 2013. However the roots of the problems, which local dwellers have to face in their daily life, are more acutely linked to the “water embargo” imposed on the region by the South Ossetian de facto authorities and the Russian trade embargo on their agricultural products.

The changes taking place in Georgia at the end of 2014 will have crucial implications for next year’s political and economic agenda. In the beginning of December, a bout of reshuffles started both in government and inside the ruling Georgian Dream coalition (GD). It was the second wave of shifts since November, when the Free Democrats, led by the former Defense Minister Irakli Alasania left the GD coalition. This time, the alterations occurred within the GD party itself and affected the senior and mid-level government officials as well as party’s political council.

The party’s executive secretary, and PM Irakli Garibashvili’s relative, Zviad Jankarashvili resigned. Until April, 2014 he was head of the General Inspection of the Ministry of Internal Affairs (MIA). Meanwhile, first Deputy Interior Minister Giorgi Zedelashvili, a distant relative of Jankarashvili and one of the most influential figures in the MIA, was detached from the ministry and moved to the post of Deputy Secretary of the State Security and Crisis Management Council.

The head of the Special State Protection Service (SSPS) – an agency responsible for the security of high-ranking officials, state facilities and buildings – Teimuraz Mgebrishvili, was replaced by Ivanishvili’s former chief bodyguard Anzor Chubinidze. Another close associate of Ivanishvili, Nodar Javakhishvili, replaced Zurab Kopadze on the post of Deputy Minister of Regional Development and Infrastructure.

The heads of the State Security Service (SSS) and the General Inspection of the MIA, Malkhaz Chikviladze and Irakli Samkurashvili, also resigned. Ivanishvili’s crony, Mirian Mchedlishvili became head of the SSS.

Nearly all opposition parties detect Ivanishvili’s hand behind the recent relocations. Rumors swirled about Ivanishvili’s growing mistrust toward Garibashvili. Allegedly, Ivanishvili appointed his trusted associates to tactically important posts in order to control the PM.

The United National Movement (UNM) accused Garibashvili’s family of bribery long before the reshuffles. At the beginning of this year, the party disclosed an apparent corruption scheme run by Garibashvili and his father-in-law, Tamaz Tamazashvili. The scheme allegedly envisaged the establishment of fake firms and companies to participate in state tenders and accumulate large amounts of money. UNM asserts that the total volume of corrupt deals amounts to US$ 8 million.

The changes in government and GD were accompanied by a drastic depreciation of the Georgian Lari (GEL) which lost around 12 percent of its value against the U.S. Dollar in mid- December. Although Garibashvili’s government insisted that the drop was mainly caused by external factors, economic analysts argue that the government’s inefficient economic policy disrupted the balance between the US$ and GEL.

According to some economic analysts, the toughened visa regulations for foreigners imposed by the government last year have damaged the overall investment climate. The volume of investments has dropped by 10 percent for two quarters in 2014 compared to the same period of 2013. Although another source of external financing – export – has recently increased, the growth rate of imports is still much higher than that of export. Meanwhile, the ongoing economic recession in Russia contributed to a drop in the volume of remittances to Georgia.

As a result, abridged US$ inflows instigated a depreciation of the GEL, especially harmful for those who get their incomes in the national currency but have taken loans in Dollars. Data from Georgia’s National Bank disclose that 60 percent of all loans and 77 percent of mortgages are dollarized, implying that a significant share of the population is affected by the Lari depreciation.

Moreover, the appreciation of USD against GEL connotes that imported goods will become more expensive for Georgians. Taking into account that import comprises 49 percent of Georgia’s GDP while imported products constitute 70 percent of Georgia’s consumer basket, the ongoing depreciation of the GEL appears to be especially troubling.

Economic concerns amplified the uncertainty triggered by the shifts taken place inside the GD party. Several analysts and politicians have discussed Ivanishvili’s changing confidence in Garibashvili, which could end with the PM’s reassignment. Many speculations have also been devoted to the question who might be the next PM and whether Ivanishvili himself may officially return to politics.

Although the expected changes will heighten the political turbulence and economic fluctuations in the country, instability seems to be growing even without further shifts in the government. GD’s pattern of ruling deprives Georgia of institutional development and instead benefits crony networks, clan clashes and personality politics.

Meanwhile, if economic predicaments are not dealt with timely and efficiently by pursuing a more liberal economic policy, the country may face both political and economic crises. Alarmingly, these problems could derail Georgia’s Euro-Atlantic course and seriously slow the country’s democratic development.

In 2015, the Georgian government will have to address the most critical issues to maintain social stability. Thus, this year may present the true litmus test for GD and its ability to preserve its status as Georgia’s dominant political force.

On November 30, the parliament of Georgia overruled President Giorgi Margvelashvili’s veto and adopted the government-backed law on surveillance and eavesdropping, maintaining direct access for the Ministry of Internal Affairs’ (MIA) to telecom operators’ networks.

Meanwhile, Margvelashvili’s alternative bill – prohibiting interception of communications by the law enforcement agencies without court authorization, and the Republican Party’s (RP) separate, competing bill – intended to sever the MIA’s direct access to telecommunication operators’ networks – were voted down by the parliament.

In 2010, the previous parliament adopted a legislative amendment empowering the MIA to install “black box” spy devices in telecommunication companies’ networks. Opposition parties and watchdog groups strongly criticized the move and accused the then-ruling United National Movement (UNM) party of establishing illegal surveillance practices in Georgia to strengthen its grip on power.

However, in May 2014, the disclosure of wiretapped phone conversations of incumbent and former high officials, including parliament speaker Davit Usupashvili and then-defense minister Irakli Alasania, prompted allegations that the ruling GD coalition had continued illicit eavesdropping after assuming leadership.

The enduring question whether security agencies should keep direct, unfettered access to telecom operators’ networks – “key” as it has been labeled informally – has inflamed debates among politicians, lawyers and lawmakers even within the GD coalition.

The government-backed bill prepared by the chairwoman of the parliamentary human rights committee MP Eka Beselia, her deputy MP Gedevan Popkhadze, and the chairman of the defense and security committee MP Irakli Sesiashvili, supported the MIA’s sustained access to telecom operators’ networks whereas RP – one of the GD coalition’s founders, insisted that the MIA should be deprived of this capability. This position was shared by a few other GD MPs, the Free Democrats (FD), which recently left the coalition, and UNM.

Advocates of the government-sponsored bill asserted that the MIA, incorporating intelligence and security agencies, should maintain a “key” to deal with growing “security challenges” efficiently. To avoid unlimited access, however, the bill’s sponsors suggested a “two-key system,” where one should be kept in the MIA and the other at the Personal Data Protection Inspector’s Office (PDPIO). In spite of having direct access to telecom operators’ servers, the MIA will not be able to start interception and monitoring of communications without the permission of the PDPIO’s, which will in turn be equipped with relevant technical capabilities.

Opponents argued that a more precise reading of the law, involving numerous technical terms about a lawful interception management system, enables the MIA to bypass PDPIO and thus fails to provide a genuinely balanced system. The law grants PDPIO the right to issue technical permission for the security agencies to launch lawful interception of communications, meaning that the PDPIO’s competence goes beyond a monitoring function and makes it part of the process. Holding the “key,” PDPIO is able to execute actions rather than simply observing them, while its major function is to oversee that surveillance is pursued in compliance with court warrants, as put by one opponent of the law, Free Democrat Shalva Shavgulidze.

On November 27, the parliament voted down a separate, competing bill introduced by RP. It envisaged the transmission of a “key” to the Georgian National Communication Commission and depriving the MIA of its direct access. RP leader Usupashvili said that the examples of some European countries, presented by the supporters of government’s bill, where the interior ministries have direct access to telecom operators’ networks, were irrelevant as the structure of those agencies are completely different from Georgia’s MIA, which incorporates not only police forces, but also security and intelligence agencies.

Earlier this year, the civil society organizations (CSO) engaged in the parliament’s working group – including the Georgian Young Lawyers’ Association and Transparency International Georgia – presented a “two key” model. Like RP, CSO also supported depriving the MIA of access to telecom operators and instead suggested to grant “keys” both to the telecom operators themselves and the judiciary. In this model, the judiciary would issue a warrant for surveillance upon the request of the security agencies and would in the event of approval technically allow interception to begin.

PM Irakli Gharibashvili slammed the CSO’s initiative, saying that the owners of all the three largest mobile phone operator companies in Georgia are foreigners and the country “cannot rely on foreign companies when it comes to state security and citizens’ security.”

Initially, the “two key” proposal was aired in late September at a conference in Tbilisi attended by European experts on personal data protection invited by the Council of Europe (CoE). One of the experts, Joseph Cannataci, said the idea of a “two key” system is that holder institutions will gain separate access to communication operator’s networks, implying that the MIA cannot get admission alone but will need confirmation from the second holder institution.

While the government insists that the law on surveillance and eavesdropping is intended to reflect this cornerstone principle, the shortfalls of the law suggest something deferent. In this respect, GD seems willing to continue the UNM’s tendency to enhance the MIA’s unfettered power instead of subjecting it to institutional checks and democratic oversight. The Georgian watchdog groups pledged to protest the law through streets demonstrations and by appealing against the Georgian state in the Constitutional Court.

On November 24, the Russian government signed an agreement with Abkhazia that will further diminish the already limited sovereignty of this territory in exchange for Russian investments and social benefits for the population. The South Ossetian government has signaled that Russia is preparing a similar agreement with this Georgian breakaway territory. Some South Ossetians, however, have unexpectedly spoken out in favor of retaining the republic’s sovereignty. As Russia lays the groundwork for the annexation of Abkhazia and South Ossetia, it encounters surprising opposition from the tiny republics that have become accustomed to a certain degree of independence from Moscow. Tighter control of Abkhazia and South Ossetia will increase the security risks for Georgia.

The Central Asia-Caucasus Analyst is a biweekly publication of the Central Asia-Caucasus Institute & Silk Road Studies Program, a Joint Transatlantic Research and Policy Center affiliated with the American Foreign Policy Council, Washington DC., and the Institute for Security and Development Policy, Stockholm. For 15 years, the Analyst has brought cutting edge analysis of the region geared toward a practitioner audience.